But Mr Wheeler said the bank could look through temporary shocks such as the slump in oil, and a knee-jerk policy reaction could do damage.

"It would cut across the flexibility deliberately built into the PTA framework, and risk creating serious distortions in the financial system, housing market, and broader economy."

Core inflation, which discounts temporary factors, is sitting at about 1.6 percent, close to the middle of the bank's target band, and inflation expectations were also close to the RBNZ's expectations, he said.

The Reserve Bank last week held its official cash rate steady at 2.5 percent but warned that it could cut rates again if needed.

The weak inflation outlook, volatile financial markets and uncertain global economy has led to several analysts forecasting a rate cut to as low as 2 percent by the end of the year.

"If concerns deepen around the prospects for the global economy and its impact on New Zealand, some further policy easing may be needed over the coming year to ensure future average inflation settles near the middle of the target range," Mr Wheeler said.

Annette Beacher, chief Asia-Pacific strategist at TD Securities in Singapore, said the speech showed the governor was "in no mood to cut (rates)".

The New Zealand dollar rose after the speech as financial markets reduced the chances of a rate cut next month.